(This post follows from our themes in previous posts. It might appear to be heresy, but worry not, my capitalism and democracy friends. We discuss here one important part of how we lift capitalism to its high and true potential. This post offers a perspective far too long missed).
What? Surely anyone with a scintilla of understanding of the business of business knows the assertion in this title amounts to blasphemy. Throughout commercial time, it has been an accepted axiom that a seller will sell her/his wares if and only if they receive payment for them greater than the cost they incur to produce and sell them. The amount by which the payment exceeds the cost is called profit. And, sale after sale, year after year, the accumulation of this difference can be called wealth creation, right? Right!
So, where’s the beef? Well, a focus on profit as a motive does a critical disservice to the higher nature of people, to our better angels. In more practical and commercial terms, it causes the business to fall short of the wealth creation potential it really has.
Profit, as we note above and as has been acknowledged by many students of economics, finance and business over time, is an axiom, an axiomatic outcome of the commercial process – not a motive. To suggest that it motivates the seller (producer), is to; (1) do a disservice to the seller (producer) as a person whose special aptitudes are being used to produce something she/he has a passion to produce in order to please the buyer, the consumer and (2) cause a sub-optimization of the use of all the input resources required to create the product.
The real bell-ringing motive of the seller (the producer) in the commercial process, the one that creates maximum wealth over time, is to optimize the value provided to each primary stakeholder group (customer, employee, supplier, investor, community where the producer (seller) exists and the general public interest). It is this primal motive that causes the seller, the producer, to actualize her/his potential, to be thrilled to the max AND to create the highest near and long term profit possible as an outcome of this value-optimizing motive over time. Confusing motive and outcome (profit as an axiom) results at best in pretty good wealth creation over time, but not maximum wealth creation.
Well, so what? The answer to this provocative question is that a focus on profit rather than on optimizing value by definition causes the producer (seller), and those who watch her/him, to be continuously looking inward, to be enchanted with winning (relative to other sellers (producers)) and to slip into the seductive short termism behavior so prominent in the commercial world – especially the investment banking part of the commercial world. By contrast, the value-optimizing focus allows the seller (producer) to be consumed with and captivated by continuously innovating and creating the best possible product or service for the customer, while also; (1) providing employees the truly fairest compensation and the fullest possible self-actualization opportunities, (2) providing the suppliers with the most attractive long term fair compensation), (3) providing communities the best citizen behavior and (4) providing the general public the most able and willing co-creator of the best society over the long run.
It all sounds so delightful, but also implausible. A bit more explanation is in order, to connect with normal business and organizational practice.
Normal Business Practice.
The normal blocking and tackling of a business lies in the important functions of effectiveness, efficiency, productivity, creativity and innovation. When a business (our seller (producer)) is focused on optimizing the value provided to its primary stakeholder groups, the likelihood (the probability) that these blocking and tackling functions will be performed at their highest level is itself maximized.
Without explaining every piece here all at once, other related realities about the market, local and global, such as universally held unalienable rights and ubiquitously treasured virtues will cause the products and services of our seller (producer) to attract buyers (consumers) above all other choices available to them. The marketing opportunity will have been elegantly achieved and exceeded, simply by focusing on serving others in this way. AND, the profit outcome, the accumulating wealth, will be maximized as a result - a necessary and natural result of doing what is right and actualizing one’s potential (individuals and groups of individuals (companies)) as a seller (producer).
What Does It all Mean?
The dominant focus of for profit business over the years has been inward, near term and win-lose. Profit has been all too often taught to be both the “business of business” and that which owners and managers should focus on. It is as though the motivation of producers (sellers) is to be achieved by a continuously ringing cash register. How silly that is, and how demeaning! Indeed, though, wealth has been produced over time, much wealth, but not enough for the very reasons we present. The primal motive has been misstated.
However, if business had been dominantly focused on value creation for its customers and its other primary stakeholders over the years, more wealth would have been produced. More importantly, in this beginning of the 21st century, with the globally disruptive communication and technology revolution as one significant catalyst for paradigm change by itself, we have the opportunity and obligation to reset our dominant focus toward primary stakeholder group value optimization. Companies will rock because; (1) customers will eagerly buy their product or service, (2) their employees will be able to fully actualize their individual and group value, (3) suppliers will receive optimal value through their relationship with the companies, (4) communities will receive optimal value from the company as a citizen member of the community, (5) the general public interest will have a willing participant in optimizing value in the public interest and (6) investors, including owner-investors, will have both optimal and maximized long term value – importantly and necessarily (axiomatically) including maximized wealth creation.
By the way, this same paradigm change in focus applies to non-profit organizations, governments – all organizations, local and global.
The case for a reset of the definition of motivation and focus for businesses (and all organizations) to the obvious - Optimization of value for primary stakeholder groups - is clear. More can be written about it, but the case is intuitive, and it is certainly more than a semantics game. It is the literal heart and soul of the highest behavior we can engage in as people and economic actors for local and global societies.